Legal Challenges in International Business
By Joanne Hue, Last updated: 2022-04-07 (originally published on 2021-12-06)
Globalization has brought a significant change in how businesses operate. It has created global opportunities for businesses and marked a greater shift towards an integrated global economy by removing the trade barriers. This also changed the preference of buyers because goods and services are now easily sourced from foreign countries.
Therefore, it is important to understand the actual meaning of international business, the legal challenges faced by the businesses to operate internationally and the ways in which international law regulates the business transactions of different countries. This article discusses these factors in detail in the following paragraphs.
What is meant by International Business?
The term international business relates to business or transactions across international borders. International business mostly refers to the production, distribution or sale of goods or services between different countries. This exchange is not limited to the transfer of money for goods but it can extend and go beyond to include cross-border transfer of other resources like intellectual property, persons, using foreign assets or execution of complex financial transactions offshore etc.
However, it can extend to other forms of international business where products or goods are produced in offshore jurisdictions but sold in the domestic market. This also includes outsourcing customer services overseas to such locations where labour is cheap. This implies that the international business involves entities ranging from a small import-export company to big firms with a large number of employees engaged in worldwide business.
Such a wide interpretation of international business helps to serve better where the world has turned away from simple industrial dealings.
What are the key legal issues that need to be considered in determining global expansion?
Although there are benefits attached to doing business internationally, legal issues and challenges don’t take a back seat while operating across cross-border jurisdictions. The risks attached to international business are inherent. There are legal issues attached while considering the global expansion of the business. Some legal issues are detailed below:
1. Choice of structure:
It is paramount to consider the structure of the company and the objectives which it wants to pursue. For example, whether the company plans to only sell or buy products in the international markets or it also wants to produce and manufacture products in such markets.
Is the company willing to operate its business for the long term or is it considering only short term projects? It can also emphasize its relationship with local partners where it aims to form a partnership. It is important for a company to carefully identify and assess its resources before undertaking any international expansion.
Apart from this, it should also recognize and realise its capacity to take up projects locally because exporting the resources will be expensive. Such capacity includes its previous international experience, legal expertise, language and cultural differences to fully understand the financial, as well as labour, needs to operate locally in those international markets.
2. Governing Laws
Where the company seeks to operate its business internationally and hires foreign employees, it needs to make sure that employees filing and payroll obligations are protected and governed by the laws of their own country of residence.
Therefore, it is required to have a local employment contract in place. It safeguards the employees and provides more clarification of the terms and conditions of the employment. Where the company is engaged in selling the goods, it also has to focus on applicable consumer laws, data protection rules and regulations.
Certain companies offer shares as part of their remuneration and it is worthwhile for an employer to consider local tax laws and an efficient tax plan for offshore employees to avoid large tax bills. Some employees may not be willing to accept shares due to the stringent tax laws of the country.
4. Intellectual Property
To avoid infringement of intellectual property such as patents, trademarks, and designs, it should be registered in all the international markets where the company is operating its business. Where any company wishes to operate its business in three or more EU countries, it can apply for EU-wide protection. However, it can opt to file in the individual countries where its target is only limited markets.
5. Localization of terms
Where the company plans to operate its business and sell its products in international markets, then it needs to make sure that terms are localized legally and translated into the local language. Inaction on the company’s part will invite complaints on terms that are not dictated and it will not limit the company’s liability.
6. Foreign Policies, Politics and Relations
Foreign laws, policies, politics and relationships between countries have a huge impact on doing business internationally. It is important to keep updated information and follow the latest news of the country where you wish to operate your business. The laws and regulations of foreign countries such as labour laws, taxes, raw material costs, transportation and other factors are generally impacted or influenced by the decisions of political leaders.
As we know that tax varies from one country to another and opting for advice for tax structuring will help in minimizing tax obligations and global transfer pricing rules can apply for intercompany agreements. Every tax authority wants its local businesses to pay a maximum contribution and for such purposes, local payroll taxes and social security payments can be deducted at the source.
8. Data protection
The UK has strict data protection laws to protect the personal data and information businesses receive. Any private information regarding such owners may not be used or disclosed overseas without having proper safety measures in place to protect such information and it may also require the prior consent of the person to whom the information relates.
Apart from these legal issues, there are some other inherent challenges or risks which need to be taken into account when considering the benefits of international business:
9. Foreign currency exchange and inflation:
The value of a foreign currency differs from country to country and usually, it won’t be the same as your home currency. Therefore, it is necessary to consider and be familiar with the exchange rates between home currency and the foreign currency where you wish to operate the business.
Along with the exchange rate, one has to keep a note of inflation rates as well. These differ from country to country and can influence the local labour expenses, material cost and other pricing related to products and services. Having knowledge and understanding of both currency exchange and inflation rates helps in estimating the value of products across different jurisdictions.
10. Language Barriers
It is significant to consider language barriers when planning to engage in international business. It is important to know the languages used and spoken in a foreign country where you plan to expand your business.
It is relevant to see if your business idea or product message can be translated well into a foreign language even with the help of interpreters or native speakers. It can be rightly said that to operate a business at an international level and for its smooth functioning, it is better to invest in engaging or hiring interpreters.
11. Cultural Differences
The way each country has its own language, it also has its own culture which consists of food, traditions, societal norms, arts etc. Such cultural differences are followed and celebrated by the people of those specific countries. It is not only important but also enriching to acquaint itself with different cultures where a company wants to operate its business.
Understanding the cultural differences helps in better management of teams, international dealings, doing overseas business and it highlights the emphasis given to knowing and respecting their culture which is necessary to conduct a successful business at an international level. One great example of cultural difference is different time zones.
12. Managing Global Teams
Another important aspect to consider when planning to do overseas business is to manage the team worldwide. When seeking to work as a team, it is important but hard to account for factors such as language barriers, cultural differences, different time zones and other factors. For better interaction and communication as well as to build a strong global team, it is preferred to facilitate regular meetings using video conferencing.
What is the difference between laws and regulations?
There is a misnomer that the laws and regulations are the same thing and are used in the same way. However, there are differences between both of them.
Laws are outcomes of Statutes passed by the Legislature. Laws are to be obeyed and followed by every person including private individuals, groups of individuals, companies as well as public authorities, institutions etc.
Laws detail principles, procedures and standards which must be followed by everyone. These are enforced by government officials, whereas, Regulations are rules and standards for enforcing and monitoring law. These are adopted by the administrative agencies. Like laws, regulations are also written and published.
The main difference between the two is that law goes through the process of the bill in both the houses of parliament before it is enacted as a law whereas, regulations are created by the governmental agencies to enforce laws and these need not go through the process of the bill.
Can international law regulate business transactions of different countries?
Each country has its own rules and regulations, own government, foreign policies, inflation rates and currency exchange rates which makes the business models more complex. Therefore, there is a need for international law which eases the process of doing business globally.
International Commercial Law regulates the business transactions of different countries. It is a body set up of legal rules, international treaties or conventions, international customs or usages to govern international business transactions.
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